Timothy Noah

Liberal v. Conservative Fed-Bashing


My New Republic colleague Jonathan Cohn's otherwise excellent Sept. 21 post, about congressional Republican leaders' thuggish letter to Ben Bernanke telling the Fed chief not to engage in further economic stimulus, is marred, in its postscript, by an excess of fair-mindedness. Citing the Washington Post's Ezra Klein, Cohn concedes that yes, there was a time when Democrats were equally guilty of trying to interfere with the independent Federal Reserve Board. And so they were. House Speaker Jim Wright actually called for Fed Chairman Paul Volcker's resignation back in 1982 when Volcker was in the process of vanquishing a decade's worth of out-of-control inflation with high interest rates (though my mentor Charles Peters, himself a spirited Fed-basher at the time, points out that an oil glut that materialized in 1981, and a steep collapse in oil prices in 1986, had a thing or two to do with conquering the Great Inflation). Let he who is without sin etc.

What Cohn (and Klein) neglected to point out in making their comparison was the differing purposes of Democratic Fed-bashing and Republican Fed-bashing. The Democrats attacked Volcker because his tight-money policies brought on a recession and drove the unemployment rate to a postwar high of 10.8 percent. Even the Great Recession of 2007-2009 (which may be segueing into a second recession of 2011-2012) never matched that. Today the consensus among economists is that Volcker was proven correct that inflicting severe pain on the economy in the short term would yield long-term benefit. But the pain was very real, and those who criticized the Fed in 1981 and 1982 were motivated by a desire to end it. If Peters is right, then that suffering wasn't actually necessary. And even if he's wrong, relatively little of the subsequent economic recovery's benefits trickled down to ordinary people. During President Ronald Reagan's two terms in office median household income increased by a mere 9.8 percent, compared to 14.5 percent during President Bill Clinton's two terms a decade later.

To summarize: Democrats bashed the Fed because its policies put people out of work and halted economic growth. They may have been wrong to do so, but they weren't wrong to worry about the 1981-1982 recession's harmful effects.

Why are Republicans bashing the Fed? Because they think its policies are inflationary. With interest rates at historic lows, that's just laughable. Because they think it will create (I'm quoting the GOP letter now) "more fluctuations and uncertainty." That's true. When you attempt to revive the economy you create some uncertainty about whether it will dive straight into the crapper. Because it will "promote more borrowing by overleveraged consumers." But borrowing is precisely what's needed in the short term; if the GOP were at all sincere in its worry about long-term consumer debt it wouldn't be burning Elizabeth Warren in effigy and trying to kill off every last provision in the Dodd-Frank financial reform bill. In short, the Republicans are bashing the Fed because they don't give a damn about unemployment and sluggish growth. A charitable explanation would be that they think short-term suffering is necessary to restore solvency (though if they think the nation's public and private debt can be eliminated as quickly as inflation was in the early 1980s they are seriously deluded). That is very different from wanting to end suffering and hasten economic growth, which is what the Fed-bashing Democrats, rightly or wrongly, wanted back in 1982. A not-charitable (and more plausible) explanation is that the Fed-bashing Republicans want the economy to worsen to improve their side's chances of winning back the presidency in 2012. For that, there is no Democratic precedent.

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